Monthly Archives: December 2014

It was no fun to be an investor last week. The week prior, a commentary in The Wall Street Journal’s blog, MoneyBeat, offered this insight:

“Falling oil prices are thought to be good for stocks because they stimulate consumer spending and hold down inflation. The lower costs support economic growth, boost corporate earnings, and lessen pressure on the Federal Reserve to raise interest rates. The stock market loves that mix.”

That was not the case last week. A selling spree, sparked in part by concerns related to energy, led to virtually every major world stock index (every one that Barron’s follows, anyway) moving lower. The single exception was the Shanghai Composite and that was flat.

It seems the International Energy Agency’s prediction that demand for energy would grow more slowly in 2015, combined with the fact supply of some resources has been growing, addled investors and they sold everything but the kitchen sink. Even industries that may be helped by lower energy costs – consumer goods, consumer services, health care, and others – lost value. In the United States, stock markets delivered their worst performance in more than three years, according to Barron’s.

Have investors lost sight of the fact the United States has a consumption-driven economy?

The Federal Reserve Bank of St. Louis reported personal consumption – how much Americans are spending on goods and services – was 70 percent of gross domestic product (the value of all goods and services produced) in the United States during the third quarter of 2014. Lower energy prices tend to put more money in the pockets of consumers so they can spend more and that can help the economy grow. In fact, U.S. News reported, “…approximately every penny decline in the price of a gallon of gasoline translates to about $1 billion in additional disposable income for American households.”

It’s interesting to note consumers – a group that overlaps with investors in a Venn diagram – are more confident than they have been in almost eight years, according to data released by the University of Michigan and cited by Barron’s.

Data as of 12/12/14

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-3.5%

8.3%

12.8%

17.4%

12.4%

5.3%

10-year Treasury Note (Yield Only)

2.1

NA

2.9

2.0

3.6

4.2

Gold (per ounce)

1.9

1.3

-0.4

-9.8

1.6

10.8

Bloomberg Commodity Index

-1.3

-11.9

-12.3

-7.7

-3.8

-2.6

DJ Equity All REIT Total Return Index

0.0

26.0

29.3

17.9

16.7

8.3

S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

what does the future hold? The good news is most analysts expect economic growth in the United States to continue. The Wall Street Journal, The Economist, The Federal Reserve, and the International Monetary Fund all have forecast gross domestic product growth in the United States at 2.5 to 3.0 percent for 2015. That’s not quite as good as the 7 percent growth forecast for China or the 6.5 percent growth estimated for India, but it’s decent for a developed nation with a mature economy.

There are factors that could hurt the economic outlook in the United States. Economists participating in The Wall Street Journal’s Economic Forecasting Survey said a negative global event was the biggest threat to U.S. economic growth followed by slower global growth. Three of the risks The Economist believes could keep companies from operating at target profitability during 2015 include:

Deflation in the Eurozone: “A Japanese-style stagnation in the euro zone would have profoundly negative implications for global demand, especially at a time when growth in the emerging markets is also softening.”

Spillover from Syria’s Civil War: “…The prospect of [ISIS] diverting its energies from Iraq and into Syria and its neighbors (such as Lebanon and Jordan) could prompt an uptick in oil’s political risk premium once more.”

Escalation of the Russia–Ukraine conflict: “…The recently imposed trade restrictions have not only plunged Russia into recession, but also contributed to sinking industrial output in Germany… further sanctions could see Russia cutting off natural gas sales to Ukraine or the European Union (as is currently already reportedly occurring with supplies to Poland)… [these acts] would no doubt have a deleterious impact on the [Euro] region’s economic recovery.”

There are also factors that could improve the outlook. The Wall Street Journal’s survey found economists believe tightening labor markets, higher wages, better consumer spending, and low energy prices could support U.S. economic growth during 2015.

Weekly Focus – Think About It

“The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don’t play together, the club won’t be worth a dime.

–Babe Ruth, American baseball player

Best regards,

John Raudat, AIF, CFS, PPC

P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Dow Jones Industrial Average and Standard & Poor’s 500 closed at record highs for the 34th time and 49th time this year, respectively. The impetus last week was a jobs report that far exceeded expectations. For the 10th consecutive month, more than 200,000 jobs have been created. That’s the longest string of improvements since 1994, according to Reuters. Not only did U.S. employers hire the most new workers in three years, wages ticked higher, too. An expert cited by Barron’s said the underlying report data was promising:

“The average workweek was 34.6 hours, up from 34.5, and where it was before the 2008 crisis. That level acts as an effective ceiling to additional hours and suggests employers will have to increase hiring, he says – hence the pop in bond yields. The 10-year U.S. Treasury bond yield jumped to 2.31 percent from 2.26 percent on Friday. (Bond prices move inversely to yields.)”

The Stoxx Europe Index closed at a relatively high level, even though things weren’t so rosy economically in the Eurozone. Inflation continued to fall and is now close to zero. The last time inflation was at 2 percent, which is the level targeted by the European Central Bank (ECB), was two years ago, according to The New York Times.

The ECB continues to talk a big game without taking any action, according to Barron’s. Last week, President Mario Draghi said the ECB plans to assess the success of its current stimulus programs as well as the effects of lower energy prices early in 2015. However, he offered no specific monetary easing measures or a timeline for action. It was the same message he delivered in October and November of 2014. Experts cited by The New York Times indicated the ECB could lose credibility if it fails to act early next year.

Data as of 12/5/14

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.4%

12.3%

16.3%

18.2%

13.5%

5.7%

10-year Treasury Note (Yield Only)

2.3

NA

2.9

2.1

3.5

4.2

Gold (per ounce)

1.0

-0.6

-2.3

-11.9

0.9

10.2

Bloomberg Commodity Index

-0.7

-10.8

-10.4

-8.3

-3.6

-2.6

DJ Equity All REIT Total Return Index

-0.4

26.0

26.9

17.5

17.3

8.3

S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

pondering the effects of long working hours. In 1960, about one-half of the jobs in the United States were at least mildly physically strenuous. Gosh, how things have changed. Today, we’re a lot more sedentary. Just 20 percent of jobs are at all strenuous and has produced the wrong type of growth, according to Joelle Abramowitz, an economist at the U.S. Census Bureau and author of a paper entitled, The connection between working hours and body mass index in the U.S.: a time use analysis.

Abramowitz found 70 percent or more of people who work 40 or more hours a week are overweight. All those extra hours people put in trying to impress the boss, or wining and dining clients, don’t pay off when it comes to maintaining a healthy weight. For every 10 hours worked – over and above the weekly 40 – at a non-strenuous job, men gain about 1.4 pounds and women gain about 2.5 pounds. The Economist theorized longer work hours might translate into less exercise time, more take-out meals, and fewer hours of sleep. All of these have the potential to affect weight.

In a separate article, The Economist pointed out there has been a significant shift in the leisure time of the rich and the poor. One expert cited said, “In the 19th century you could tell how poor somebody was by how long they worked.” That has changed over time. In 1965, college-educated men, who tended to earn more than men without college degrees, had more leisure time than men with only high school diplomas. By 2005 the college-educated enjoyed eight hours less leisure time each week than the high school grads.

It’s interesting to note less than 60 percent of Americans who work 20 or fewer hours a week are overweight.

Weekly Focus – Think About It

“The best remedy for those who are afraid, lonely or unhappy is to go outside, somewhere where they can be quiet, alone with the heavens, nature, and God. Because only then does one feel that all is as it should be.”

–Anne Frank, Writer

Best regards,

John Raudat, AIF, CFS, PPC

P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

If investors around the world were voting on their favorite stock market, there is little doubt U.S. markets would finish near the top. Barron’s explained, “For the past three years, Wall Street has been trouncing the world’s other markets, inducing investors to pile in and bail on other assets.”

So, how popular are U.S. markets? The Standard & Poor’s 500 Index (S&P 500) has not moved lower for four consecutive days during 2014, according to experts cited by Barron’s. That breaks S&P 500’s previous record for longest period in a calendar year without four down days in a row which happened in 1997. The streak ended in late August of that year.

In September, more than $164 billion were invested in the United States by investors at home and abroad. The reason investors are attracted to U.S. markets is no secret. Last week’s economic data may have been mixed, but it didn’t change the fact U.S. economic growth has been relatively strong. Third quarter’s gross domestic product – the value of all goods and services produced in the United States – was revised higher last week from 3.5 percent to 3.9 percent. Both readings were above the consensus estimate of 3.3 percent. That’s pretty strong growth compared to some other countries:

“While U.S. gains have been modest compared with previous expansions, domestic growth is outpacing other advanced economies. Japan’s economy slipped into a recession in the third quarter and the eurozone’s growth barely stayed positive. The rate of growth in emerging markets from China to Brazil is also slowing,” reported The Wall Street Journal.

Although U.S. economic growth during the middle quarters of 2014 was the fastest in a decade, The Wall Street Journal suggested the improvement might be a modest acceleration rather than a major breakout. They cautioned U.S. exports and military spending made attractive contributions to third quarter growth, but that could change if there is a global slowdown or the government cuts military budgets.

Data as of 11/28/14

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.2%

11.9%

14.5%

20.1%

13.5%

5.8%

10-year Treasury Note (Yield Only)

2.2

NA

2.7

2.0

3.2

4.3

Gold (per ounce)

-1.8

-1.6

-5.0

-11.6

0.1

10.1

Bloomberg Commodity Index

-4.4

-10.2

-9.1

-7.6

-3.7

-3.1

DJ Equity All REIT Total Return Index

1.8

26.4

27.2

19.3

18.0

8.7

S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

What return-on-investment (ROI) does a liberal arts degree deliver? There has been a lot of hullabaloo lately about whether a bachelor’s in English, or any other liberal arts degree, is worth earning. Forbes explained it like this:

“Humanities degrees have received a bad rap recently, even from President Obama. Many people, including top policy makers, routinely push policies to encourage more students to major in STEM fields (science, technology, engineering, and mathematics). Some governors have even suggested that state subsidies for public universities should be focused on STEM disciplines, with less money going to “less useful” degrees such as the humanities. Yet, in contravention to this perceived truth, the data show that humanities degrees are still worth a great deal.”

How much are they worth? While working on a project to estimate the economic impact of his university, Professor Jeffrey Dorfman discovered bachelor’s degrees in art, drama, English, French, history, philosophy, and political science have ROI of 300 to 700 percent for students (or parents) who spent about $80,000 on tuition, room and board, and other education-related expenses. Art majors had the lowest ROI and philosophy majors had the highest.

Make no mistake. There are bachelor’s degrees with higher ROI. The top-paying majors include engineering, mathematics, physics, government, economics, international relations, geology, technology, and chemistry, according to Payscale.com. Classics majors, who earn even more than philosophy majors, came in at number 50 out of 130 majors listed by earnings potential.

Forbes offered some simple guidelines for students who are considering graduate school and want to evaluate whether the investment will pay off. Some suggestions for students are:

Assume every dollar of debt will cost two dollars by the time it has been paid back.

Estimate the cost impact of years in grad school on potential retirement savings.

If undergraduate debt and grad school debt combined are higher than a conservative estimate of first-year salary, then the cost of education is too high.

If debt is less than first-year salary, calculate lifetime earnings with and without grad school.

Most importantly, Forbes cautioned, it’s important to remember that all projections could be wrong. A student may not find a job right away or the job found could pay far more than expected. Industries may become obsolete. Economies may falter. It’s difficult to account for all of the variables that may affect income over a lifetime.

Weekly Focus – Think About It

If you recently spent some time circling a mall parking lot, looking for a place to park, you may want to consider an approach recommended to CNBC.com by former math teacher Joseph Pagano. “Rather than circle the lot, idle in an aisle where you can see 10 spaces ahead of you on either side (20 total). Given the average holiday shopping trip duration of 77 minutes, per the Bureau of Labor Statistics, one of those 20 spots should open up in 3.85 minutes or less of waiting.”

Best regards,

John Raudat, AIF, CFS, PPC

P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.